EUR/USD calm as eurozone manufacturing improves

The euro has posted slight losses on Monday. EUR/USD is trading at 1.0835 in the European session, down 0.11% on the day.

Eurozone manufacturing close to stabilizing

The eurozone manufacturing sector is still contracting but there is light at the end of the tunnel. The manufacturing PMI rose to 47.3 in May, up from 45.7 in April and just shy of the market estimate of 47.4. The reading was the highest in 14 months. Business confidence in future manufacturing conditions also rose and hit its highest level in more than two years.

Germany, the largest economy in the eurozone, also saw a softer contraction in manufacturing production. Manufacturing PMI accelerated to 45.4, up from 42.5 in April and in line with expectations. The eurozone and Germany release services PMIs on Tuesday, with both releases expected to show growth.

It could be a historic week for the European Central Bank, which is widely expected to lower interest rates at Thursday’s meeting for the first time since March 2016. The ECB’s steep rate-tightening cycle has seen inflation fall from double-digits to the current rate of 2.6%. This is still above the ECB’s target of 2%, but the central bank is sufficiently confident that inflation won’t rebound after a rate cut. The May CPI report, released last week, showed that headline and core CPI accelerated unexpectedly, but that is unlikely to derail the expected decision to lower rates.

The US released the Personal Consumption Expenditure price index, the Federal Reserve’s favorite inflation indicator, on Friday. The indicator was unchanged at 2.7% y/y and 0.3% m/m in line with expectations. This points to inflation remaining sticky as the Fed tries to push it down to the 2% target.

EUR/USD Technical

EUR/USD is testing support at 1.0842. Below, there is support at 1.0741

1.0895 and 1.0943 are the next lines of resistance